Small businesses offer great opportunities for financial advisors, especially when it comes to helping them offer 401(k) retirement plans to their employees.
A new study from Vestwell, a New York-based record-keeping company for employer-sponsored retirement plans, found that many small employers are upgrading their 401(k)s and seeking professional advice on how to do so. Of the 250 companies surveyed by Vestwell — most of which had fewer than 100 employees — 44% said they planned to make changes to their 401(k)s this year, including increasing their contribution, adding enrollment automatic and other adjustments.
This is good news for advisors, as employers want their help in implementing these changes. Fifty-seven percent of companies said an advisor “adds value” by consulting on plan design. Another 65% said they wanted advisors to give investment recommendations.
Small businesses are America’s economic engine. Small Business Administration Data To display 32.5 million of these businesses in 2021 employing more than 61 million people in 2021. This represents 99.9% of all businesses in the country and almost half, or 46.8%, of all workers. Small businesses generate approximately 44% of all US economic output. Yet nearly three out of four companies, or 74%, do not offer a 401(k), according to the National Association of Diet Advisors.
For wealth management professionals, it all boils down to one thing: a lot of potential new business.
“Financial advisors have an incredible opportunity to harness industry momentum for the growth of their own practice,” said Aaron Schumm, CEO of Vestwell. “It’s clear that small business owners see the value that a financial advisor’s expertise can bring to their business.”
There’s also a big role to play in education: 54% of employers want advisors to train them on plan administration, and 62% want them to teach employees about their 401(k)s. In fact, nearly half, or 47%, said training employees was the most valuable thing an advisor could do. Workers are also interested – 90% of employees said they want their company to offer retirement education.
“Think of a small business – it’s rare that there’s a profit team,” Schumm said. “So they go to the advisor, which basically becomes an extension of the benefits arm of the small business.”
In the United States, the 401(k) is by far the most common type of employer-sponsored retirement plan. In total there are approx. 60 million active 401(k) participants, with combined assets of $7.7 trillion — 70% of total savings in all direct-contribution plans, according to the Institute of Investment Companies.
Vestwell expects these numbers to increase further. A major reason is SECURE 2.0, a set of pension reforms that Congress passed late last year. Among other measures, the law mandates automatic enrollment in all new 401(k) plans, beginning in 2025 (except those for churches, government agencies, and businesses with fewer than 11 employees). It could make a big difference; a study by Vanguard found that auto-enrollment tripled the number of new hires who signed up for their plans – from 28% to 91%.
Meanwhile, small businesses, generally defined as those with less than 500 employees, are making their own efforts to entice their workers to register. Among employers surveyed by Vestwell, 41% have increased their matching contribution, 31% have introduced automatic enrollment and 18% have relaxed their employee eligibility criteria.
If all these efforts succeed, Vestwell thinks small businesses could become a source of new clients for advisers.
“Where employers are expanding their benefits, counselors are expanding their practices,” the study says. “In other words, the small business market is on its way to becoming big business.”
Many in the industry already see this potential. In its survey of nearly 500 advisors, Vestwell found that 40% expect their practice to grow significantly as small businesses expand their plans. For Schumm, the conclusion to be drawn from all this data is simple:
“Don’t ignore small businesses,” he said. “Everyone should think about how to engage in the small plan market because it is growing very, very rapidly.”